George Soros On The World's Shifting Challenges

As 2013 comes to a close, efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. All of the looming problems for the global economy are political in character.

After 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. And, judging from the public’s enthusiastic support, so would ordinary Japanese.

By contrast, the European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape. The stakes are high: Nation-states can survive a lost decade or more; but the EU, an incomplete association of nation-states, could easily be destroyed by it.

The euro’s design – which was modeled on the Deutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default. As a consequence of the crash of 2008, several member countries became over indebted, and risk premia made the eurozone’s division into creditor and debtor countries permanent.

This defect could have been corrected by replacing individual countries’ bonds with Eurobonds. Unfortunately, German Chancellor Angela Merkel, reflecting the radical change that Germans’ attitudes toward European integration have undergone, ruled that out. Prior to reunification, Germany was the main motor of integration; now, weighed down by reunification’s costs, German taxpayers are determined to avoid becoming European debtors’ deep pocket.

After the crash of 2008, Merkel insisted that each country should look after its own financial institutions and government debts should be paid in full. Without realizing it, Germany is repeating the tragic error of the French after World War I. Prime Minister Aristide Briand’s insistence on reparations led to the rise of Hitler; Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe.

The current arrangements governing the euro are here to stay, because Germany will always do the bare minimum to preserve the common currency – and because the markets and the European authorities would punish any other country that challenged these arrangements. Nonetheless, the acute phase of the financial crisis is now over. The European financial authorities have tacitly recognized that austerity is counterproductive and have stopped imposing additional fiscal constraints. This has given the debtor countries some breathing room, and, even in the absence of any growth prospects, financial markets have stabilized.

Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.

As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.

In contrast to Europe, the United States is emerging as the developed world’s strongest economy. Shale energy has given the US an important competitive advantage in manufacturing in general and in petrochemicals in particular. The banking and household sectors have made some progress in deleveraging. Quantitative easing has boosted asset values. And the housing market has improved, with construction lowering unemployment. The fiscal drag exerted by sequestration is also about to expire.

More surprising, the polarization of American politics shows signs of reversing. The two-party system worked reasonably well for two centuries, because both parties had to compete for the middle ground in general elections. Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neo-conservatives, that moved it to a far-right extreme. The Democrats tried to catch up in order to capture the middle ground, and both parties colluded in gerrymandering Congressional districts. As a consequence, activist-dominated party primaries took precedence over general elections.

That completed the polarization of American politics. Eventually, the Republican Party’s Tea Party wing overplayed its hand. After the recent debacle of the government shutdown, what remains of the Republican establishment has begun fighting back, and this should lead to a revival of the two-party system.

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. But there is a significant difference, too. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.

Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. The economy turned around on a dime. In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. These developments are largely responsible for the recent improvement in the global outlook.

The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.

How and when this contradiction will be resolved will have profound consequences for China and the world. A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad.

The other great unresolved problem is the absence of proper global governance. The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syria – not to mention allowing global warming to proceed largely unhindered. But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely.

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"All of the looming problems for the global economy are political in character."

LMFAO!!! Just what you want the masses to believe, hey Buffet... I mean, Soros. Friggin' pig. When is enough enough for you? Admitting the MASSIVE, structural insolvency in the banking sector might just get you some brownie points Soros.

We are on the support line, 1200 for gold and 20 for silver, and when you see the above remind yourself that algorythems are controlling the trading. So the algobots are swooping in at these very certain price levels, which they have been set to do by order and instruction. It's only a matter of time before we close above 1300, probably in the next few weeks, easily by the end of the month.

Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.

I think he is saying that the politicalization of human existence (something he had a part in) has necessarily turned every problem into a political issue. Today, we consult the government for what we wear, eat, buy, build, tax, donate, drink, smoke, trade, travel and educate. There is no sphere that does not have federal oversight or mandates...making every problem a political one.

has soros moved into that secure pent house in vagas? who runs his empire? does everyone change into germ free clothing with white gloves before an audience with the mogol? perhaps his handlers keep his meds titrated well.

That might have been one of the most incongruent and nonsensical pieces of written work I have ever read, besides it being chocked full of lies.

Exactly. This quote stood out quite a bit:

As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.

Not to state the obvious here george, but how has this worked every single time it's been tried? More importantly, why does it work out this way?

When he kicks off, I'm hoping he kicks off the death train of all those scumbags who are actually running the world wide oppression. You know, those Build-a-burger types. Throw in the owners of the Carlyle group, Trilateral commision, CFR, etc.

Interesting that he knows that government interventon in the Chinese economy has long term contradicditons but tolerates it in the short term because it fosters global economic stability.Same attitude toward the US,where the party of structural change,the tea party is maligned and the maintainers of the status quo are supported.This lines his pockets.Claims to be the supporter of open societies but by that he means an open pocketbook (QE and abenomics), that benefits his own interests.

Buffey is working on getting the gov't to put in the transportation infrastructure up the gut of the country from Mexico. It will produce ???? number of jobs and lift GDP by a zillion! Buffey no longer risks investment; he uses his street cred via gov't pawns to get what he wants.

The forum's naivety never ceases to amaze me. I had always found Soros to be informative and well intentioned. His comments on US markets were spot on from the bottom in 2009, although his dire predictions for Europe unless they go the Eurobond route panned out.

He is really a breath of fresh air compared to the shills like Druckermiller, all those Pete Peterson and David Koch clones like David Stockman: selfish and greedy austerity hawks who like Michael Hudson said would rather annul 90% of human beings than forgive their debts.

Compare Soros to his formers partner Jimmy Rodgers? Rodgers ran away to Singapore and never ever gave a cent to anyone! Soros has spend billions to make the world a better place.

russia must be the new old bogeyman to rally the eurozone and help the people ignore poverty.

the usa(the dollar) must lead the world. the crazies will be expelled and a new plan implemented because.......

the real threat is china. china can do what it wants because they are the fiat kings. they can create and disappear money at will because .gov is the economy and their currency is used in a quasihitler model where debt is registered on the books but the books don't matter because the money is owed to .gov, itself. meanwhile people get paid and stuff(whether they need it or not) gets built and china replaces the fiat with real stuff. they out brillianted the brilliant bernanke. it may have helped that the chinese invented fiat.

george says that unless china joins the game at hand instead of the game they want played(go beats checkers) there will be war.

If Germany does not want to PAY to bail out the Eurozone, exactly how is the crisis "political"? Seems to me the issue is whether the weak sisters in the Eurozone can pull themselves up by their own bootstraps, instead of continuously asking for a hand from Germany.

It takes courage for a libertarian blogsite; and I don't mean it in a derogatory sense; to post a position of chief proponent of a "rational new world order"; unlike the Neocon one that reigns today.

Soros has been very prescient in analysing Euro-pains and Euro-future as he is very much of European culture.

His analysis of US economic recovery will raise eyebrows in ZH, as it negates the fundamental mantra defended here : QE is the source of this financial dystopia which he does not support; on the contrary. His optimism on shale plays has the same flavour.

So hats off TDs for presenting his case here fairly, for all to assess.

Even tho' its contrived status quo type spin to most of you libertarians.

As a European I listen to this guy on where the Euro ship heads. And you don't need to be a rocket scientist to see China now positioning to be top Nation in Asia; as can be seen by its presence in Pakistan as in Africa :

Spot on. Soros raised social-democratic politicians in Central Europe via paying them jobs at his open society think tanks. These politicians voted for bail-ins and ESM transfers and participation after 2008 happened and banks went bankrupt. Every sane person knows that this man is part of the robbing elite.

And after my readings during the holidays I am very cautious about what I find here on ZH posted by TD. The time will tell.

Thinking back to when Soros attacked the pound sterling I have changed my view recently.Although a highly leveraged position,and no doubt seen as predatory by the UK,sharks always attack the weak and bleeding.This was pure capitalism and price discovery,market working in a dynamic fashion to expoit opportunity.Compare this event to the FED buying up all this MBS crap in America,and then charging all of us for "saving the economy",by keeping interest rates ultra low discouraging saving (for kids college?) and encouraging debt-fueled spending.All Soros did was the little kid saying "the Emperor is naked!".A very gutsy move,and his gamble paid off.The UK spent a week trying to prop up the currency and then ended up devalueing after all.Now I see why they don't want a gold-linked currency.

So I guess according to Soros no government should have even the possibility of having to default on its debts... at least not explicitly. What a crock.

"The euro’s design – which was modeled on the Deutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default."

Maybe all debt should be that way, public AND private. We're ALL winners. NO ONE loses... EVER!

Well, can't say I like Soros; or any of the like. But considering ZH's comment section has become the home of the ignorant redneck, taking a contrarian view of what they say there will always pay dividends.

I think being married to that young chick has scrambled his brains. Wasn't he victimized by the Nazi's before escaping? He certainly has profited from that experience Let's pretend again just like they did in the Weimar Republic that everything is honky dory. My conclusion: fuck you rotten lying piece of shit.